Case No 11329
| Jurisdiction | South Africa |
| Judge | Satchwell J |
| Judgment Date | 10 August 2005 |
| Citation | 2005 JDR 1158 (JSpCrt) |
| Docket Number | 11329 |
Satchwell J:
Introduction :
This judgment requires the Court to examine, yet again, the vexed question of what constitutes 'trade' for purposes of Sections 11 and 20 of the Income Tax Act.
The appellant taxpayer is A which is the holding company for the B. In the determination of its taxable income for the year under assessment ended 31 December 2001, the taxpayer had submitted its return of income together with a supporting set of financial statements.
The Commissioner has disallowed an assessed loss in the sum of R1,282,117 which was carried forward by the taxpayer from 2000 on the grounds both that "the company did not trade" and had not derived any income during the year of assessment. The Commissioner has also disallowed claimed expenditure of R84,262 for the 2001 year on the basis that such expenditure had not been incurred in the course of trade. The total sum disallowed is R1,366,379.
The original financial statements showed that the appellant had derived no income during the 2001 year of assessment. However, after the aforesaid disallowance by the Commissioner, the taxpayer revealed that interest earned from loans made by the taxpayer to subsidiary companies had been omitted from these particular financial statements and this income tax return. Revised financial statements and tax return were then prepared disclosing interest income in the amount of R230 000 for the year of assessment. The taxpayer performed the appropriate arithmetical calculation and requested a revised assessment to reflect the assessed loss to be R1 132 237.
The taxpayer has objected to the Commissioner's assessment mainly on the basis that it has indeed traded during the year of assessment under review. On disallowance of the objection, the taxpayer lodged an appeal to the Tax Court.
Relevant legislation and approach thereto:
Section 11 (a) of the Income Tax Act, Act 58 of 1962 ("the Act"), determines that a taxpayer may, in the determination of its taxable income derived from carrying on a trade, deduct any expenditure incurred in the production of income which is not of a capital nature. Section 20 of the Act determines that a taxpayer may, in the determination of his taxable income, set off any income,
2005 JDR 1158 p2
Satchwell J
derived from the carrying on of his trade, against any balance of assessed loss carried forward from the preceding year of assessment.
In applying these sections of the Act, it is accepted that a taxpayer must comply with the following requirements before a deduction will be allowed or an assessed loss carried forward from the preceding year of assessment namely -
The first enquiry is whether or not the taxpayer carried on a "trade" (Sections 11 and 20). Where this question is answered in the affirmative then two further issues must be addressed.
With regard to the expenditure claimed as a deduction, an enquiry must then be undertaken to determine whether such expenditure was incurred in the production of income and not of a capital nature (Section 11).
With regard to the carrying forward of the assessed loss, an enquiry must then be undertaken to determine whether the taxpayer had derived income or incurred a loss from the said trade (Section 20).
The term "trade" is defined in Section 1 of the Act as "...every profession, trade, business, employment, calling, occupation or venture, including the letting of any property...".
The moment a company does not carry on a trade in a subsequent year, the assessed loss is forever lost. The loss is not denied where a taxpayer company has not traded for a number of years - it is denied where an assessed loss is sought to be carried forward from a preceding year and the immediately subsequent year is not one in which trade is conducted [1] .
Background of the appellant taxpayer:
The taxpayer was incorporated in 1985 in C. It converted to a public company on the Johannesburg Stock Exchange in 1992 under the name of "A" Ltd. The Memorandum and Articles of Association of the company claim its main object to be "a holding company". The Director's Reports to the Financial Statements for the taxpayer state that "the company and its subsidiaries manufacture and market luggage and commercial trailers and trailer components".
In the years under review the subsidiary companies of the taxpayer were D (Pty) Ltd, E (Proprietary) Ltd, F (Proprietary) Ltd and G (Pty) Ltd. The date of incorporation as also the main objects of these subsidiary companies are unknown since the court has not been provided with any documentation pertaining thereto.
The financial year of the taxpayer runs from 1st January to 31st December.
Evidence - onus
Section 82 of the Act raises a statutory presumption in favour of the validity of an assessment issued by the Commissioner. It was common cause at the
2005 JDR 1158 p3
Satchwell J
hearing of this matter that the onus is placed on the taxpayer to show that an amount included in the assessment is not taxable [2] .
What is required is affirmative evidence that satisfies the court, upon a preponderance of probability, that the amount is not taxable. Mere statements uncorroborated by evidence are insufficient to discharge the onus.
By agreement a bundle of documents was handed up to the court and both the taxpayer and the Commissioner have agreed that such documents are what they purport to be. No witness testified and both parties relied on the documents received into evidence.
Evidence on 'trade' - the taxpayer
Mr Bregman, who appeared for the taxpayer, advised that the main business of the taxpayer is the manufacturing and selling of trailers for which purposes the subsidiary companies, D and E, are utilised.
1998
Mr Bregman took the court through a series of documents pertaining to board meetings of the taxpayer during the 1998 financial year in which there was reference to the supply of steel, obtaining of bank finance, financing business deals, development of software, pending litigation and attention to marketing.
Presented into evidence was an agreement dated 10th November 1998, entered into between E (Pty) Ltd and H CC ("the dealer") titled a "network dealership agreement". Our attention was specifically drawn to paragraph 16.1 of the agreement which records that "the dealer ... will have access to trade secrets and confidential information of the Company, and of the Company's holding and/or subsidiaries and/or associated companies ("the (A) Group") relating to the business of the (A) Group..".
1999
No documentation was adverted relevant to the 1999 financial year.
2000
Mr Bregman referred the court to the minutes of the Annual General Meeting held on 23rd March 2000 at which a director retired and was re-elected, the financial statements for the 1998 financial year were adopted and auditor's and director's fees were approved.
In the same year there were further minutes of what purported to be another Annual General Meeting on 28th September 2000 at which it appeared that a director retired and was re-elected, the annual financial statements for the 1999 financial year and auditor's report were adopted and approved, director's and auditor's remuneration was approved and it was agreed that un-issued shares of the company be placed under the control of the directors.
In the financial year ending December 2000 , there were two Executive and two Non-Executive directors. The statement by the then Chairman with regard
2005 JDR 1158 p4
Satchwell J
to "Directors responsibility for Financial statements" stated that "The directors are responsible for the maintenance of adequate accounting records and the preparation and integrity of the annual financial statements, group annual financial statements and related financial information included in this report... the directors are also responsible for assistance of internal control which are designed to provide reasonable, but not absolute, assurance as to the reliability of the financial statements..." Clearly, the value of such statement by the Chairman lies in granting absolution to the independent auditors whose task and responsibility it was to express an opinion on financial statements which are the responsibility of the company's directors.
The Corporate Governance Statement for the 2000 financial year stated that the Chairman and the Board meet at least twice a year and that the Board "review [s] the operation and performance of the Group and considers issues such as strategy, business plans and policies and to approve budgets, major contracts and commitments, and other significant matters likely to have a material impact on the Group". As far as financial control is concerned it is stated that "Head office executives meet formally on a regular basis with all major operating subsidiaries to review financial and other presentations". By reason of the nature and size of the group "the Board considers the establishment of an internal audit function to be impractical" and this function is performed "from time to time" by head office personnel.
The 'trading results' of the group were set out in the Directors Report for the 2000 financial year and disclosed total revenue in 1999 of R31million and total revenue in 2000 of R53 million.
2001
For the 2001 financial year, the court was presented with resolutions of directors authorising attendance and voting rights at the "Annual General Meeting" to be held on 28 September 2001. The minutes of that meeting record that one director retired and was re-elected, annual financial statements for the 2000 financial year and auditor's reports were adopted and approved, director's and auditor's remuneration was approved.
On 9 April 2002, control of the B Group of...
To continue reading
Request your trial